Car prices could come down significantly if the government-appointed panel's recommendation of a standard tax rate of 17-18 per cent for most goods and services is accepted. Manufacturers, which currently pay 30-50 per cent taxes on cars, are likely to pass the benefits of lower taxes to consumers, analysts say.
"The automobile sector could benefit significantly from GST if the government accepts the recommendations of the GST panel and puts automobiles (except luxury cars) in the general category of standard goods and services with a rate of 17-18 per cent," said Sanjeev Prasad of Kotak Institutional Equities.
Small cars (length of less than 4 metres and engine size below 1500 cc) are currently taxed at 30.4 per cent, which includes an excise duty of 12.5 per cent, central sales tax of 2 per cent, national calamity contingent duty of 1 per cent and VAT of 12.5 per cent.
Once the GST comes into effect, manufacturers may have to pay a tax of 17 -18 per cent on small cars, which could bring down prices by 12 per cent to 13 per cent.
"As GST would subsume all taxes, a standard rate of 17 per cent would mean that prices could come down by over 10 per cent," said Kapil Singh and Siddhartha Bera of Nomura. (Read)
The benefits of GST would not only accrue to small cars, but luxury cars too even though they are proposed to be taxed at 40 per cent under GST. Sedans (over 4 metres) and sports utility vehicles (SUVs) are currently taxed at 44.5 per cent and 52 per cent respectively.
Utility vehicle maker Mahindra & Mahindra Chairman Anand Mahindra on Tuesday came out strongly in support of the GST. The government wants to introduce the GST from April 1, 2016, but the biggest revenue shake-up since independence is stuck in the Rajya Sabha, where the government does not have a majority.
Simplest way I know of understanding the significance of the GS Tax: In a fragile world,India's Brahmastra is its huge domestic market (1/2)— anand mahindra (@anandmahindra) December 8, 2015
Without GST we effectively divide our own country & prevent it being a common market. We render ineffective our own secret weapon.(2/2)— anand mahindra (@anandmahindra) December 8, 2015
The implementation of the GST will not only impact prices of cars, but also boost margins of auto manufacturers as they will no longer have to maintain depots across major states.
"The recommendation for abolishing inter-state tax, if implemented, could lead to servicing from a few major hubs, less time lost at state entry-exit points, improved efficiency and better fleet utilisation levels," Nomura said. The reduction in logistics costs could boost margins of manufacturers by 30-40 basis points, it added.
Prices of spare parts (including batteries) are also likely to come down on GST implementation. The spare part industry is currently taxed at 28 per cent and it may have to pay 17-18 per cent tax once GST comes into effect.